FOR INVENTORY ESTIMATION PROBLEMS

1. GROSS PROFIT METHOD

COST OF GOODS AVAILABLE FOR SALE (COGAS) actual* XX
LESS: COST OF SALES (ESTIMATE) ** (XX)
ESTIMATED ENDING INVENTORY XX

*COGAS is actual, that is consider all items included in the computation of COGAS (inventory-beginning + purchases +
freight in – purchase discount – purchase returns and allowances + department transfer in – department transfer out –
abnormal spoilage, breakage, shrinkage)

**COST OF SALES is estimated by:

-Gross sales x cost rate (if GP is based on sales)
-Gross sales/selling price rate (if GP is based on cost)

***for the purpose of estimating Cost of Sales: assume that all sales were made under normal GP rate thus, when
computing gross sales,
-ignore sales discounts to customers
-add back special discounts to gross sales (e.g. employee discounts)
-deduct sales return from gross sales
-ignore sales allowances (deduct if sales return and allowances as single account is provided)
-normal spoilage, breakage, shoplifting losses shall be added back to gross sales at selling price.
2. RETAIL METHOD
COST OF GOODS AVAILABLE FOR SALE (@ retail) XX
LESS: COST OF SALES (@ retail) (= gross sales) (XX)
ESTIMATED ENDING INVENTORY (@ retail) XX
MULTIPLY BY COST RATE (conservative/LCA or average) %
ESTIMATED ENDING INVENTORY (@ cost) XX

COST RETAIL
Beginning inventory xx xx
Add: purchases xx xx
Freight in xx
Less: purchase discount (xx)
Purchase returns (xx) (xx)
Purchase allowance (xx)
Add: department transfer in (debit) xx xx
Less: department transfer out (credit) (xx) (xx)
Less: abnormal breakage, shrinkage, spoilage (xx) (xx)
Add: mark-ups, net of cancellations xx
COGAS under CONSERVATIVE/LCA xx / xx = cost rate conservative/LCA
Less: mark-downs, net of cancellations (xx)
COGAS under AVERAGE APPROACH xx / xx = cost rate under average
Retail
Gross sales xx
Less: sales return (xx)
Add: special discounts xx
normal spoilage, shoplifting losses, breakages xx
SALE/Cost of sales at retail xx

*FOR FIFO AVERAGE, SIMPLY DISREGARD IN THE COMPUTATION THE COST % THE BEGINNING INVENTORIES:
COST % = COGAS @ COST – BEG. INVTY @ COST or NET PURCHASE @ COST
COGAS @ RETAIL – BEG. INVTY. @ RETAIL NET PURCHASE @ RETAIL

PEROBLEM 1. (GPM)
MM prepares monthly income statement. A physical inventory is taken only at year-end; hence, month-end
inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 50%. The ff. information
relates to the month of June:
AR, June 1 102,000
AR, June 30 153,000
Collection of AR during June 255,000
Inventory, June 1 183,600
Purchases of inventory during June 163,200
How much is the estimated cost of June 30 inventory? _______________________

PROBLEM 2. (GPM)
On the eve of June 15, 2018, a fire destroyed the entire inventory of MM Corp. The merchandised was not
insured with any insurance company. The ff. data were gathered:
Inventory, Jan. 1 250,000
Purchases, Jan. 1 to June 15 1,500,000
Sales, Jan. 1 to June 15 2,000,000
Mark-up percentage on cost 25%
What is the estimated value of inventory destroyed by fire? ________________________
PROBLEM 3. (GPM)
The ff. information is available for MM Co. for the three months ended March 31, 2018:
Inventory, Jan. 1 1,200,000
Purchases 4,500,000
Freight-in 300,000
Sales 6,400,000
Gross margin on sales 25%
What is the inventory balance at March, 31, 2018? _______________________________

PROBLEM 4. (GPM)
On Sept. 30, 2018, a flood at MM Co.’s warehouse caused severe damage to its entire inventory. Based on
recent history, MM has a gross profit of 25% of net sales. The ff. data were gathered for the nine months ended Sept.
30:
Inventory, Jan. 1 520,000
Purchases 4,120,000
Purchase returns 60,000
Sales 5,600,000
Sales discounts 400,000
A physical inventory disclosed usable damaged items which MM estimates can be sold to a jobber for 70,000.
How much is the estimated cost of inventory loss? ______________________

PROBLEM 5. (GPM)
The ff. information appears in MM records for the year ended Dec. 31, 2018:
Inventory, Jan. 1 325,000
Purchases 1,150,000
Purchase returns 40,000
Freight-in 30,000
Sales 1,700,000
Sales discounts 10,000
Sales returns 15,000
On Dec. 31, the company conducted a physical inventory which revealed that the ending inventory was only
210,000. MM’s gross profit on net sales has remained constant at 30% in recent years. MM suspects that some
inventory may have been pilfered by one of the company’s employee. How much is the estimated cost of the missing
inventory? ____________________________

PROBLEM 6. (GPM)
On Sept. 14, 2018, a typhoon damaged the warehouse of MM Corp. The entire company and many accounting
records stored in the warehouse were completely destroyed. Although the inventory was not insured, a portion could be
sold for scrap. Through the use of microfilmed records, the ff. data were gathered:
Inventory, Jan. 1 375,000
Purchases, Jan. 1 to Sept. 14 1,385,000
Cash sales, Jan. to Sept. 14 225,000
Collections of AR, Jan. 1 to Sept. 14 2,115,000
AR, Jan. 1 175,000
AR, Sept. 14 265,000
Salvage value of damage inventory 5,000
GPR on sales 32%
How much is the value of inventory loss? ___________________
How much is the total sales from Jan. 1 to Sept. 14? ________________________
PROBLEM 7. (GPM)
On Dec. 24, 2018, a fire destroyed totally the raw materials “bodega” of MM Manufacturing. There were no
purchases of raw materials from the time of the fire until Dec. 31, 2018.
INVENTORIES JAN. 1, 2018 DEC. 1, 2018
Raw materials 180,000 ?
Factory supplies 12,000 10,000
Goods in process 370,000 420,000
Finished goods 440,000 450,000
The accounting records shows the ff. data:
Sales 2,400,000
Purchases of raw materials 800,000
Purchases of factory supplies 60,000
Freight-in for raw materials 30,000
Direct labor 440,000
Manufacturing overhead, 75% of direct labor; GPR, 35% of sales.
What is the cost of raw materials destroyed by fire? ________________________

PROBLEM 8. (RETAIL)
MM uses the retail inventory method to estimates its inventory for interim statement purposes. Data relating to
the inventory computation at June 30, 2018 are as follows:
COST RETAIL
Inventory, Jan. 1 820,000 1,262,800
Net purchases 2,280,000 3,607,200
Net mark-ups 450,000
Net mark-downs 320,000
Sales 4,350,000
Sales returns 300,000
Employee discount 100,000
Sales discount 80,000
Normal shrinkage 50,000
What is the estimated cost of June 30 inventory using average approach? ____________________________

PROBLEM 9. (RETAIL)
Presented below is information related to MM Inc.:
COST RETAIL
Inventory, Jan. 1 250,000 390,000
Purchases 914,500 1,460,000
Purchase returns 60,000 80,000
Purchase discounts 18,000 -
Gross sales (after employee discounts) 1,260,000
Sales returns - 97,500
Markups - 120,000
Markup cancellations - 40,000
Markdowns - 45,000
Markdown cancellations - 20,000
Freight-in 79,000 -
Employee discount granted - 8,000
Loss from breakage - 2,500
MM uses the conventional/conservative/LCA method, how much would be the cost of ending inventory on Dec. 31,
2018? __________________
PROBLEM 10. (RETAIL)
MM, a dept. store, uses the retail inventory method to estimate inventory. The ff. data are available for the year
ended Dec. 31, 2018:
COST RETAIL
Inventory, Jan. 1 61,700 105,700
Purchases 128,100 215,800
Purchase returns 2,100 3,500
Sales - 236,500
Freight-in 3,100
How much would be the inventory pilferage if the physical count revealed an ending inventory at retail of
78,000? _________________________

PROBLEM 11. (RETAIL)

MM uses the retail inventory method to estimate its inventory for interim financial purposes. Data relating to
the inventory computation at Sept. 30, 2018 follows:
COST RETAIL
Inventory, July 1, 2018 360,000 500,000
Purchases 2,040,000 3,150,000
Net markups 350,000
Net markdowns 250,000
Sales 3,410,000
Normal shoplifting losses 40,000
What is the estimated cost of inventory under the conventional or market method? ________________
PROBLEM 12. (RETAIL)
MM inventory shows the ff. information at Dec. 31, 2018:
Inventory beginning
Cost 560,000
Retail 1,400,000
Purchases
Cost 4,960,000
Retail 10,320,000
Freight-in 150,000
Markups 1,000,000
Markup cancellations 120,000
Markdowns 500,000
Markdown cancellations 100,000
Sales 10,000,000
Estimated normal shrinkage 2.5% of sales
MM uses retail inventory method of estimating inventory. How much is the estimated cost of inventory in 2018?
_____________________________